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AT&T's Deal For Dominance Led to Its Demise

By Jeffrey Birnbaum

The Washington Post
Monday, February 7, 2005; Page E01

Last week, AT&T, better known as Ma Bell, agreed to be eaten by one of its progeny, the Baby Bell named SBC. The Oedipal irony is more than just another story about mergers and acquisitions. It is an epic saga -- some might say a tragedy -- about Washington and its fickle relations with the world of commerce.

It also is a grand object lesson in lobbying. AT&T is not only an American icon. It was also once the world's largest company and, without question, the nation's most powerful lobby. To reach that pinnacle it made a devil's bargain with the U.S. government.

In exchange for being allowed monopoly status nearly a century ago, it agreed to be highly regulated. But when times changed and lawmakers fell under the sway of its enemies, not even AT&T's legendary powers of political persuasion could save it from its downfall.

Companies that live by federal sanction can die by federal sanction, too. Here's how it happened to AT&T.

At the end of the 19th century, lots of little phone companies dotted the countryside. From 1894 to 1904 more than 6,000 independent telephone firms went into business in the United States. Considering that Alexander Graham Bell had invented the telephone fewer than 20 years before, in 1876, the proliferation was impressive.

It also was very messy. The economic marketplace tends to be that way. Government, on the other hand, has the power to tidy things up and that's precisely what Theodore N. Vail, one of AT&T's early presidents, wanted. Unfortunately for his company, that's also what he got.

In 1913, the same year that the federal income tax came into being, Vail won a major concession from the capital city. He had argued for years that telephone service was a "natural monopoly" and that if it were to function efficiently it should be authorized as such. So in return for its help in keeping competitors away, Uncle Sam was given leave to scrutinize Ma Bell closely. The government forced AT&T to divest its stake in the Western Union telegraph company and invited independent phone companies to interconnect with Ma Bell's long-distance network as part of the new monopoly. For decades the arrangement worked exceptionally well. AT&T's hegemony was so protected and secure that it was even permitted to own the black telephones that were a fixture in almost every household. Residents paid a monthly fee for the privilege of using them.

Predictably, to keep such control, the company paid a lot of attention to Washington, the source of its financial well-being. The company was, and until recently remained, on the cutting edge of influence in official D.C.

The memories of modern-day lobbyists go back only so far. But everyone I've queried agrees on one recollection: As recently as the 1970s, AT&T was considered invincible -- but not because of its Washington-based lobbyists. Its entire strength rested with the thousands of Ma Bell employees who lived in virtually every city and burg in the country.

When a congressman had a question, it was answered not by some highly paid gun for hire, but by someone who lived down the street and had worked for the phone company for close to forever. AT&T's rectitude and place in the firmament was unassailable.

Until, that is, the company got a little carried away with itself. This is the Greek tragedy part of the story, in which the hero loses out because of a fatal flaw, usually arrogance.

With the rise of long-distance competitor MCI and, more important, of computers, AT&T had trouble making a compelling case that it had to control everything about telecommunications to keep people connected. It also tried to get permission to go into the computer business itself. Others saw that as exceptionally grabby, but AT&T kept pushing. It was, after all, Ma Bell.

That wasn't enough, however. The government sued to break up the company and, after many years of wrangling (a debate that was prolonged, no doubt, because AT&T was so huge and influential), the phone company was forced (in 1984) to divest its seven local phone companies.

It was the beginning of the end. AT&T's homegrown lobbying network was inherited by the Baby Bells, which started to deploy it to batter their former parent. Partly in response, AT&T added a layer of lobbying talent in Washington itself, something it hadn't needed before.

In the 1980s, AT&T was known for having one of the largest and most skilled corporate offices in Washington. Its representatives were everywhere and well-regarded on Capitol Hill. I remember one encounter between a tall AT&T lobbyist and an elegant McLean matron at a congressional cocktail party. The woman pecked the lobbyist on the cheek and then teased him: "I see you're wearing your sincere blue suit." He laughed knowingly -- as did the lawmakers standing nearby and with whom he held much sway.

But personal respect wasn't enough to hold back the tide, either. The telecommunications act of 1996 demonstrated the growing clout of the Baby Bells and AT&T made one last stab at restoring its prowess. In 1998 it hired a former White House deputy chief of staff, James W. Cicconi, to reorganize its Washington presence.

The former aide to George H. W. Bush put together what stands to this day as the model of a contemporary lobbying campaign. Under his guidance, AT&T dispensed tons of campaign cash, formed coalitions with sympathetic-sounding organizations, hired some of the biggest names in downtown Washington as lobbyists and spent millions of dollars on television advertising.

The only problem: The Baby Bells did the same things -- only with greater ferocity and in superior volume. The battle between them was pitched enough to stall for the better part of a decade legislation that would have made matters even worse for AT&T.

But finally regulators sided with the Baby Bells and took away the discount rates that allowed AT&T to provide local phone service in addition to long distance. Ma Bell was finally unmasked as a humbled giant.

AT&T may well be gobbled up by SBC and its voice of opposition to the Baby Bells will be silenced. The fate of its lobbying program, however, is still up in the air. The Baby Bells will need all the help they can get.

After all, as with any companies that have made that devil's deal, they will need to keep fighting to retain the government's blessing. The next major contest: Baby Bells vs. the cable companies.